Not euphoria, but better than the alternative

In the US, the market's reaction to today's 75 bp rate cut (a decline of about 1%) was somewhat short of euphoric, but presumably it was better than it would have been otherwise. (The reaction here in Australia was positively exuberant, however: equities up over 6% as of 11 a.m.!)

The closest recent parallel to today's Fed action is probably the surprise October 1998 rate cut, which was an effort to restore confidence in the wake of the LTCM and Russia debacles. In that case, the market's 4% gain could have been described as euphoric -- and that was how Bernanke and I described it in our 2005 Journal of Finance paper (quoted here in the Wall St. Journal's Real Time Economics blog). In both cases, it seems the Fed's main motivation for the rate cut was more a concern for financial stability than any new information about the macroeconomy.

Leaving aside the question of whether this was the right thing to do (see the previous post, "Too much, too late?" by Adam Posen), based on my work with Bernanke, one would have expected to see an actual increase in stock prices. The link between the two is not perfect, of course -- that's why regressions have error terms. And in this instance, the error term contained news about yesterday's global selloff.